This technical note explains what blockchain is, what it allows, as well as discusses its advantages and potential issues to consider further. It also provides an example of an application in which blockchain technology is used and describes regulatory and governance considerations. It can be used in a financial institutions or fintech course along with a case on digital currencies. Excerpt UVA-F-1810 Rev. Dec. 7, 2017 An Introduction to Blockchain I love this stuff—bitcoin, blockchain technology—and what the future holds…huge new markets and products will be built on these platforms. Abby Johnson, CEO of Fidelity Introduction . . .
Securities regulators in the world do not actively regulate cryptocurrency yet. For an effective, active securities regulation, I introduce four novel propositions for the regulators. First, the cryptocurrency technology and its peer-to-peer network are meaningless without the activities of the involved people. Second, the private key of cryptocurrency should be utilized as an identification tool. Third, the active regulation should include a mandatory reporting provision of cryptocurrency transactions and balance. Fourth, the transaction size and ledger length of cryptocurrency should be used as regulatory risk measures. My propositions are founded on a combined analysis of law, finance, math, and technology. Then, I discuss a possible unification of currencies across the globe, with the potential to establish an international cryptocurrency authority.
Bryan Abdón Mendoza Muñoz, Kelly Muñoz, Dasha Villasis
Extensive research is carried out on the two most important cryptocurrencies at world level, the Ether (Ethereum) and the Bitcoin with the passage of time has been positioned in this medium, this due to the great consensus that had the Ethereum in the course of the last three years
Die vorliegende Arbeit setzt sich mit dem Thema der Bitcoin als Kapitalanlage auseinander. Damit der Leser ein erforderliches Verständnis für die komplexe Thematik der Kryptowährung aufbaut, wird zunächst auf die Grundkonzeption der Bitcoin eingegangen. Hierbei erfolgt insbesondere eine Beschreibung des speziellen Peer-to-Peer- Netzwerk und die grundlegende Technologie der Blockchain. Die Analyse der Bitcoin als Anlageklasse beginnt mit der Preisentwicklung sowie der Untersuchung zugehöriger Einflussfaktoren auf Angebot und Nachfrage. Mittels einer Korrelationsanalyse werden die Bitcoin-Renditen anschließend ins Verhältnis zu traditionellen Anlageklassen gesetzt. Hinsichtlich der Fähigkeit, als krisenfestes Investment für Aktienkursrückgänge zu dienen, erfolgt eine historische Gegenüberstellung der Digitalwährung mit der Anlage in Gold. Hierfür werden die entsprechenden Kursentwicklungen während ausgewählter makroökonomischer und politischer Ereignisse der jüngeren Vergangenheit beobachtet. Die Untersuchung ergibt, dass die Anlageklassen Aktien und Gold eine überwiegend konträre Entwicklung aufweisen, was mit der negativen Korrelation erklärt werden kann. Unter zusätzlicher Zuhilfenahme einer Regressionsanalyse von S&P500 und Bitcoin-Preis-Index wird der kaum vorhandene Zusammenhang zwischen beiden Anlagen ersichtlich. Die ermittelten niedrigen Korrelationen zu den Vergleichsobjekten zeigen daher auf, dass die Bitcoin eine alternative und separate Anlageklasse darstellt. Unter Einbezug verschiedener deskriptiver Kennzahlen lässt sich zudem ableiten, dass die Bitcoin über ein hohes Risikopotenzial verfügt und primär als spekulative Anlage einzuordnen ist. Zur Quantifizierung dieses Risikos wird die Standardabweichung der Bitcoin-Renditen vom Erwartungswert gemessen. Die Untersuchungsergebnisse bestätigen dabei das enorme Risiko. Zur Bestimmung des tatsächlichen Verlustrisikos wird weiterhin auf das Risikomaß des Value-at-risk zurückgegriffen.
One of the key problems of blockchain technology is lack of control of users, organized societies, and state authorities over the transactions and asset on the decentralized network. The distributed ledger and blockchain are interesting as an example of new technology, which is the rule not only for users but also for governments. Technology-driven rules can be viewed as a technological law for blockchain users and legislative authorities. No legal regulation can change the anonymity or immutability of blockchain. Only another technology could turn the situation around. This is a lesson for every lawyer to learn not only the law but the scope of technology. The purpose of the article is an analysis of modern determinants of control distribution over assets, transactions, and decentralized organizations on blockchain distributed network. The article shows how control appears in a variety of different situations on blockchain network. Examples range from the individual and organizational control to control over the networking system discussing the possibilities of the participants to exercise control. On the base of the legal cases, the ability of controlling shareholder, directors, managers, governments, stakeholders and users of crypto-communities to control the organization, transactions and assets are discussed.
In December 2013 the People's Bank of China announced the restriction of Bitcoin from being involved in any services offered by financial institutions in China, fearing that the speculative risks inherent in Bitcoin is too new for Chinese investors and may endanger the national financial system. This article reviews the Bitcoin's evolvement both as currency and as investment asset around the world. Also, the regulatory treatment for Bitcoin in America is discussed. Then I used detrended ratios to compare the volatility of Bitcoin market and China's stock market, concluding that the risks inherent in Bitcoin are not unacceptable for Chinese investors. Moreover, I searched into the relationship between Bitcoin return and some fundamental economic variables, finding that Bitcoin doesn't have enough correlation with the national economic system to depress investors further during an economic downturn and that Bitcoin actually has excellent diversification benefit as portfolio component.
All human interaction can be depicted as exchanges. We exchange trivial information, feelings, assets and more. Valuable exchanges have one thing in common; they all require some degree of trust. In today’s society we rely on institutionalized trust when commencing an exchange of value. Typically, this role is filled by a vast ecosystem consisting of commercial banks, clearinghouses and other third parties. The recent rise of Bitcoin, Ethereum and consequent attention on the underlying technology, blockchain, questions the future of current ecosystem. This report aims at uncovering what blockchain is, what different implementations are currently available and how it would affect today’s ecosystem. It does so through semistructured interviews with actors within the current ecosystem as well as weighing in the views of blockchain evangelists. It highlights five key aspects that are crucial when implementing blockchain technology within the existing banking paradigm. Today’s organized societies require law and order which, to a large extent, is limited within the realm of public blockchain technology. With the insight of society’s infrastructural limitations, this paper argue that the current transaction system of our society favors a permissioned implementation with trusted nodes. Such a system would result in more efficient financial markets and lower costs of transacting. However, this paper acknowledge the virtues and reasons behind the rise of public blockchains. Given recent developments within the field and interesting concepts, the report does not dare to exclude a future of banking relying on public blockchain technology as the underlying database.
Hélder Sebastião, António Portugal Duarte, Gabriel Guerreiro
This paper analyses the price discovery process in the USD/Bitcoin market since the Mt.Gox bankruptcy until the aftermath of the hack attack on Bitfinex (01-Mar-2014 until 30-Nov-2016).The Geweke feedback measures, estimated pairwise using hourly returns, show that there is a positive relationship between the total feedback and market share, measured by trading volume, that most of the information is transmitted between exchanges within an hour, at least for the main four exchanges (Bitfinex, Bitstamp, BTC-e and ItBit), while lagged feedback runs mainly from the major exchange.Other minor exchanges seem to react to price information with some delay and are thus considered as merely satellite exchanges.Bitfinex stands out as the most important exchange in transmitting information to the market: the relative importance of the lagged feedback from Bitfinex to the market is 18.29% while the lagged feedback from the market to Bitfinex accounts only for 0.60% of the total feedback.The volatility in the major exchange in each pair is the main factor explaining the feedback measures, sustaining the claim that the information-based component of volatility increases with the relative dimension of the exchange.
This thesis is a descriptive statistical analysis of cryptocurrency market and its relation within cryptocurrencies and across asset classes, using correlation functions, orthogonalized impulse response functions and OLS regressions. Consistent with Wang (2014), bitcoin does not suffer from a liquidity trap, even though bitcoin is a decentralized system. This thesis concludes that bitcoin has a lead effect on only 2 out of 8 of the top cryptocurrencies, endowing diversification benefits within cryptocurrency market. This paper provides evidence on cryptocurrency market’s and US equity market’s impulse response dynamics which are insignificant, consistent with Gangwal’s (2016) results that adding cryptocurrencies to a diversified portfolio will yield to a higher Sharpe ratio. Lastly, the study reports bitcoin momentum factor having an impact on banking and financial industries’ excess returns.
Jean-Marc Seigneur, Hélie D'hautefort, G. Ballocchi
The number of crypto-currencies is increasing fast. On one hand, following the launch of Bitcoin in 2009, more than 1000 different crypto-currencies are listed in the crypto-currency markets. On the other hand, solutions like eCurrency exist to effectively create digital fiat currencies. There are solid economic reasons to introduce an optimized basket of fiat currencies as well, along the lines of the International Monetary Fund Special Drawing Rights, particularly for entities with global assets and liabilities or for individuals wishing to protect their purchasing power in a more and more global and multipolar world. Up to now this kind of solution was only accessible to a few large institutions due to the structure of the foreign exchange market. The main original contribution of this paper is to present the first use case of linking a managed basket of fiat currencies to a new crypto-token. The tokenisation and the use of blockchain will enable us to make it accessible to any individual gaining diversification while benefiting from good liquidity and low cost. After reviewing recent digital fiat currencies initiatives, we explain the economic rationale of our optimized currency basket and its effective implementation by means of an existing blockchain-based distributed computing platform, i.e., Ethereum. Our technological approach enables a wide range of uses of our currency basket, which would not be possible without crypto-tokens.
Mūsdienu globalizācijas apstākļos arvien vairāk naudas tiek pārskaitīta starptautiskos pārskaitījumos. Šādu pārskaitījumu veikšana izmaksā aptuveni 5% no kopējās pārskaitījuma summas, kā arī tie parasti aizņem vismaz pāris dienas, kas apgrūtina darījumu veikšanu starptautiskā līmenī. Bitcoin ir decentralizēta kriptovalūta, ar kuras palīdzību ir iespējams veikt pārskaitījumus bez distances ierobežojumiem caur internetu. Bitcoin pārskaitījumi parasti izmaksā zem 1% no darījuma summas, un pārskaitījums parasti aizņem 5 – 30 minūtes. Šajā darbā tiek apskatītas iespējas izmantot bitcoin pārskaitījumu sistēmu telekomunikāciju uzņēmuma SIA Telia Latvija interneta pakalpojumu norēķinam. Tiek analizēti potenciālie ieguvumi un norēķinu sistēmas ieviešanas izmaksas. Analīzes rezultāti liecina, ka bitcoin norēķinu sistēmas ieviešana veicinātu starptautisko klientu piesaisti un sekmētu uzņēmuma attīstību. Ieviešanas aptuveno izmaksu aprēķins ļauj secināt, ka sistēmas ieviešana atmaksātos mazāk kā piecu gadu laikā. Darbs sastāv no 60 lapām, tajā ir izmantoti 11 attēli, 4 tabulas un 55 literatūras avoti.
This research project investigated the reasons for price fluctuations of cryptocurrencies. Cryptocurrencies are digital currencies that are created over a decentralised, secure network built on the blockchain technology. The current challenges with understanding price fluctuations are that there is limited research in the field and extreme volatility in the environment. \nExploratory research was conducted using semi-structured interviews to understand and analyse the drivers of factors identified in the literature contributing to price fluctuations of cryptocurrencies. Insights were generated for the drivers of user perception, misconceptions that surround cryptocurrency security and the role of regulators in the cryptocurrency space. The research expanded the existing literature and offered propositions for future research that contribute to the theory surrounding price fluctuations of cryptocurrencies. \nThe findings should provoke business and management to reshape the way that cryptocurrencies are received and positioned in the marketplace. In addition, these findings are significant for those making business or social decisions regarding cryptocurrencies or those that are redefining traditional currency transactions.
Decentralized trusted timestamping based on blockchains is used to protect a large variety of digital data. At present, in the case of trusted timestamping services, such related information is not included in the OP_RETURN field of a Bitcoin's transaction chain, which has a limited size (40 bytes). When OP_RETURN is extended, (e.g., with multiple OP_RETURN fields) the transaction is rejected by the Bitcoin network. We propose storing data in the blockchain by encoding into Bitcoin addresses. The transactions created by the proposed method are similar to the usual transactions; therefore, they will not be rejected. The proposed method expands the storage space to a maximum of N*20 bytes, thereby enabling the storage of additional information (e.g., file names, creator names, and keywords) as well as file hashes. We performed experiments with a picture and its copyright information. We set N =3, resulting in storage of 60 bytes of data. The experimental results indicate that the proposed method can timestamp a file in an average of 24 min at a possible cost of 0.24 USD. We believe that the proposed method can prove the existence and integrity of a digital file, which is helpful in copyright protection.